knowledge centre

Key drivers of investment in European data centres

"The local balance between supply and demand is crucial when assessing the attractiveness of a co-location asset for investment."

The European data centre sector has seen significant M&A activity in the past year, on both the small and the large scale. The most important was the acquisition of Telecity by Equinix and the subsequent asset divestments this triggered. This M&A activity has partly been the result of a move toward consolidation. However, the sector is still highly fragmented in most markets and many opportunities remain. There are a number of key internal and external drivers of value when deciding to invest in a data centre business. In this article, we focus on providers of co-location services (space in data centres for customers to install their own equipment), rather than providers of cloud or IT services, which may also use data centres. We discuss some of the most important external market drivers for co-location businesses,1 such as the following:

  • drivers of demand for overall data centre space from enterprises and Internet companies
  • drivers of demand for co-location
  • the local nature of co-location demand
  • utilisation and the local balance of supply and demand.

Growth in co-location demand is driven by the desire to outsource

Overall demand for data centre space (both in-house and outsourced) comes from two main sources: enterprises and Internet companies. Enterprises use data centres, either their own or those owned by a third party, to house the servers and other equipment necessary to run their IT functions. Internet companies use data centres to house the equipment to host and process content and to route and exchange traffic. Demand from Internet companies is driven by rapidly growing Internet traffic and the need to cache content closer to end users to deliver a high quality of service. Demand from enterprises is driven by overall enterprise IT spending. In Europe, enterprise IT spending is mature, with low growth rates. However, this does not mean that demand for co-location services is experiencing low growth.

Growth in co-location demand is driven by both growth in overall demand for data centre space and an increasing tendency for enterprises to outsource their IT estate. Enterprises can outsource this either directly to co-location providers or to cloud providers, who may in turn buy data centre space from co-location providers. Most of the growth in demand from enterprises in mature markets (such as Europe) comes from an increasing desire to outsource. This is driven by both a desire to reduce costs, as co-location providers can aggregate demand in larger, more efficient data centres, and a desire for higher performance and reliability. Recent BroadGroup research suggests that in Europe outsourcing to third-party data centres will be sustained and reach 40% of the overall market by 2019. It is clear that there is significant room for further growth. The UK has the highest outsourced percentage of data centre space and even this is under 35%.

Data centres should be near their customers

Co-location is, by its nature, a local business. Customers typically use providers within an hour’s drive of their IT offices, because IT staff members require physical access to the servers or other equipment inside the data centre. The local presence of enterprises intending to outsource their data centre estate is therefore an important condition for the success of a co-location facility.

Return on investment depends on local supply and demand

This local demand must be balanced against local supply. If the demand for data centre capacity exceeds the supply in any location, then either existing or new entrant co-location providers will have no trouble filling their facilities at a higher price. In contrast, if local supply exceeds local demand, then the reverse is true and co-location providers will find it more difficult to fill their facilities. This principle determines the achievability of co-location business plans. The balance between demand and supply can be summarised by considering the length of time until existing data centre estate reaches capacity (at current growth rates) and comparing this to the 18-month to 2-year period necessary to build a new data centre (from planning approval to completion).

In summary, the local balance between supply and demand is crucial when assessing the attractiveness of a co-location asset for investment, due to the underlying local nature of data centre demand. This local balance drives the ability of the data centre to attract and retain customers at a price that allows for an attractive return. Investors should ensure they have a very detailed understanding of this when assessing particular investments.

Analysys Mason has significant experience in providing commercial due diligence support to potential investors in data centres. Please contact Andrew Kloeden at for more details.

1 There are of course many other operational, regulatory, and financial issues to consider as well, which are not the subject of this article